Time to ask advisers about passive investing – Deutsche Securities

Retail investors trying to make sense of the recent meltdown of their investments should ask their financial advisers about the low-cost alternative to trying to beat the market – passive investing.

The investment tip comes from Deutsche Securities, a subsidiary of Deutsche Bank and a leader in the field of passive investment and exchange traded funds (ETFs).

Kari van Rensburg, a director of Sandton-based Deutsche Securities, says there’s an international trend to passive investment. Growth has been maintained during recent financial turmoil, though South Africans remain under-informed about the option and the reasons for its global appeal.

Locally, the marketers of investment products have traditionally emphasised active fund management or pursuit of ‘alpha’ (above-average returns).

“In contrast, passive fund management involves the creation of index-tracking instruments designed to deliver ‘beta’, the return in that market,” says Van Rensburg.

“Active investment is typically fee-rich while passive products deliver cost savings because fees can be significantly lower. Prudent saver-investors who are averse to paying high fees for disappointing performance may be in the market for this type of investing, but just don’t know the opportunity exists.

”Advisers may simply have failed to alert them. Perhaps it’s time to ask.”

Clients typically pay bigger fees for active investment because of the sometimes substantial charges and performance fees levied by the fund manager.

A passive investment is less expensive as it simply mirrors the composition of a particular index and is content with average market performance. A convenient entry point is an ETF (a listed passive fund that complies with JSE requirements and is governed by the Financial Services Board).

Like shares, ETFs trade throughout the day and are not priced once a day like a unit trust. The structure is simple, the index constituents are well known and there is no layering of fees.

“Passive investment complements active investment,” says Van Rensburg. “Even committed active investors use passive instruments for balance and cost efficiency. Internationally, 70% of the trade in ETFs is attributed to professional active institutional managers.

“You limit ‘cost drag’ by electing to include a solid passive component within a portfolio. Studies have shown that a judicious split between active and passive investment can achieve the same opportunity for upside as a 100% active portfolio at 40% less cost.”

In South Africa, growing success has been achieved by JSE-listed Deutsche Bank db x-trackers, products that track some of the world’s largest and best known indices. But general awareness remains low.

This may soon change in a radically transformed investment environment.

Van Rensburg explains: “Internationally, there is a growing move to passive investment. In 2008, ETFs attracted global inflows of about USD200 billion, up from USD178 billion in the prior year – and this at a time when many investors were moving to the investment sidelines and building up their cash positions.

“Passive investment is an idea whose time has come. It’s certainly time to ask your adviser about an option that is not communicated nearly often enough.”